Major players like Blackrock and Fidelity have relationships with Coinbase Custody and Gemini, companies that are known as custodian and specialise in safekeeping cryptocurrencies. Coinbase and Gemini are enormous buyers of bitcoin in the public markets. They need to make sure they have enough to underpin the amount of demand coming from retail investors through the bitcoin ETFs issued by BlackRock, VanEck and others.
The more money that comes into the ETF, the more bitcoin the issuer will have to buy and hold to underpin its product.
Until now, holding bitcoin directly placed the burden of security on the investor. They were responsible for keeping their private keys safe, unless they want to entrust them to an exchange. While crypto exchanges have improved their internal security and governance following a series of high-profile collapses, unclear regulation makes it difficult for investors to claw back their assets should something unexpected happen.
To store bitcoins, investors generally need to buy hardware wallets and protect their private keys from hackers who can use them to authorise transactions and make off with the funds. Individual investors also have to work out how to file taxes for bitcoin sales that result in capital gains.
Financial institutions argue they are in a much better position to manage these risks on behalf of their customers, and many have spent millions of dollars establishing internal processes to hold, secure and trade bitcoin.
Just like with other ETFs, investors will have to pay fees to the company offering these products. The fees for a bitcoin ETF are likely to cover the custody and management costs for the purchase and storage of the cryptocurrency that underlies the fund.
And unlike traditional ETFs – like those that track the ASX200 or the S&P500 – a bitcoin ETF would not pay out any dividends as the decentralised asset doesn’t generate any.
